Does Hong Kong offer a super deduction for R&D spending?

Since the 2018 amendments, businesses can claim an enhanced profits tax deduction for qualifying R&D:

• 300% deduction on the first HK$2 million of qualifying expenditure.
• 200% on the remainder, with no cap on the enhanced amount.

Two kinds of R&D expenditure. Schedule 45 of the Ordinance, as explained in the Inland Revenue Department's (IRD's) practice note, splits qualifying R&D expenditure into:

• Type A: qualifies only for the ordinary 100% deduction.
• Type B: qualifies for the enhanced two-tiered deduction.

Which costs fall into which type (for example, staff costs, consumables, or payments to designated local research institutions) is defined in the Schedule, so check the practice note before classifying your spending.

For example, HK$3 million of Type B spend would generally give a deduction of HK$6 million on the first HK$2 million (300%) plus HK$2 million on the next HK$1 million (200%), totalling HK$8 million before other adjustments.

Points to consider

• The R&D must meet the definition and conditions set out in the Ordinance; the IRD's practice note has detailed examples.
• The enhanced rate is aimed at qualifying domestic R&D, and records of how the expenditure was incurred are important.
• Always read the current practice note before claiming; it is a specialised claim.

The deduction reduces taxable profits, so it saves tax at 8.25% or 16.5% (or the unincorporated rates).